EBRD: Successful tackling of NPL levels will help boost lending in SEE
What trends marked the development of the banking sector in Southeast Europe (SEE) in 2013?
The banking sector in Southeast Europe (SEE) was stable in 2013, but serious challenges remain: the level of non-performing loans (NPLs) is high, deleveraging continues and credit growth in the past few years has been very weak, in some cases even negative. On the positive side, there have not been any systemic bank failures in 2013. The sector has benefited from an improvement of the overall economic performances, for instance growth picked up in Macedonia, Romania, Serbia and Montenegro in 2013. This was a better year from the economic point of view. However, it was mainly driven
by exports, industrial production and agriculture, not the financial sector.
Foreign banks continued to dominate in the region with their share in total banking sector ranging from 70% in Bulgaria to more than 90% in Macedonia and Montenegro.
Where in the region do you see weakness in terms of lending momentum and where are you witnessing pockets of recovery?
The vulnerable state of the economic recovery, in the region as well as in Europe at large, remains problematic and economic growth is volatile. Some of the economies that enjoyed growth last year, such as Romania or Macedonia, are likely to continue with similar rates this year. But some may see growth falling or possibly even turning negative this year. For instance, Serbia suffered severe damage by floods in May and is facing a tight fiscal situation. Bosnia and Herzegovina was also badly damaged by floods. And Albania has started implementing austerity measures under the new IMF programme.
So it is not surprising that lending is not picking up. Banks are much more reluctant to lend but they also find it difficult to identify good projects, especially in the vital small and medium-sized enterprise sector (SME). It is a vicious circle: banks are reluctant to lend, and businesses are reluctant to consider going to banks.
When do you expect to see a tangible pick-up in lending activity in the region?
It is impossible to give such a timeline and predict when lending will pick up as it depends on a combination of factors. But there are things that authorities can do to stimulate lending. Mainly it will depend on how quickly pressing problems in the financial sector will be addressed such as the high-level of NPLs, one of the main factors holding banks back from lending.
However, what is important for SEE is that, under the broader umbrella of the Vienna Initiative - a framework for safeguarding the financial stability of emerging Europe launched at the height of the first wave of the global financial crisis in January 2009, foreign banks have remained engaged. Although the process of deleveraging continues, it is important that it does happen in a coordinated way and in steps rather than in leaps.
Once there is sustainable growth, and there are indications that we will see a pickup next year, we can expect to see an increase in lending, although not instantly. That said one should not expect a return to the growth rates of the early 2000s, when credit growth in some countries was 30% or 40% per year. So, the overall return to “normal” sustainable growth will be a lengthy process.
In particular, what is your view of the ease of access to credit financing that the corporates in the region enjoy?
Access to financing continues to be one of the biggest obstacles, particularly for entrepreneurs and small businesses in all countries of the SEE region. The EBRD is thus working at improving the access to finance through the provision of wholesale long-term funds to partner financial institutions for dedicated purposes such as on-lending to SMEs.
What role could multi-lateral lenders like the EBRD play in boosting lending activity in the region? Do you plan to step up your level of engagement in this area?
Work in the financial sector has always been a key goal and a core competency of the EBRD. The bank played an important role in the development of a modern banking sector in the region, able to serve the economy and private customers. From the start of the crisis, the EBRD has been working with other international financial institutions (IFIs), local authorities and international banking groups under the Vienna Initiative to safeguard the financial stability and prevent uncoordinated withdrawals from the region. Today, the focus is on reigniting the lending process.
One important step in this direction is boosting the confidence of borrowers and lenders. The deposit insurance funds, which we are supporting in Albania, Bosnia and Herzegovi-
Coordinated approach among banks and regulators would increase the chances of a successful outcome in tackling NPL levels.
na, Kosovo and Montenegro and planning to support in Serbia, are one important example.
Another example is the multitude of frameworks and funds we have set up to provide targeted support to, say, SMEs, local enterprises, agriculture, energy and resource efficiency, and innovation. By channelling our financing through local banks and other nonbank financial intermediaries such as leasing companies or micro finance institutions, we help them develop their capacity and knowledge in dealing with these specialised types of financing on a sustainable basis.
Within the Vienna Initiative we are working on the regulatory side in high-level policy dialogue with supervisors and authorities on legislation necessary to facilitate the resolution of such problems as the persistent high level of NPLs.
What is your view of the pace of consolidation in the SEE banking sector? What factors could speed up this process? How is the high fragmentation affecting the SEE banks' ability to lend to the corporate sector?
A consolidation of the banking sector in the region is necessary as the current number of banks in relation to the size of the economies and population may not be sustainable.
Consolidation has been gradual over the past few years. While we encourage the process we also want to see strong competition maintained, which is vital for a vibrant economy.
However, there is a level beyond which competition does not improve banking services, but instead leads to fragmentation, which adversely affects the banks' ability to extend lending. This is also a question of the right regulatory framework. At the moment, depleted valuation of banks and parent funding replacement can be obstacles to mergers and acquisitions.
What near- to mid-term challenges do you see for the development of the SEE banking sector?
The biggest obstacle for the development of the banking sector remains the high level of NPLs, accounting for up to, or even above, 20% of total loan portfolio in some countries. The second biggest obstacle is the weak local currency capital markets, which need to be developed, with a high level of “euroisation” in the system.
Non-bank sources of finance - such as assetbased lending, leasing, factoring, etc - remain limited and need to be developed to increase the levels and efficiency of financial intermediation in the region.
As European banks repair their balance sheets and rethink their business models in a context of stricter regulatory requirements, financial fragmentation and deleveraging is a continuing problem in the SEE region. In addition, the need of banking consolidation is a general trend in the region. The EBRD is working with other IFIs to support the strengthening of the financial sector by providing both capital and refinancing, and conducting high-level policy dialogue to help authorities deal with the policy framework to address the challenges the sector is facing.
What, in particular, is the risk that NPLs pose to the balance sheets of SEE lenders? Which SEE countries do you see as more exposed to this trend than others?
Addressing the level of NPLs is an urgent issue for SEE countries because dealing with bad-debt portfolios is time-consuming and discourages new lending to the economy. It is important that a coordinated approach among banks and regulators is adopted – this would increase the chances of a successful outcome. However, the NPL problem is multifaceted and there is no magic solution.
First of all, a proper diagnosis is needed to decide which companies with bad debts would be viable once the debts are restructured and which ones are non-viable and should be allowed to fail and be liquidated. This is a complex task that requires expertise and an enabling legal framework. Authorities should focus on removing barriers to restructuring, while banks should work on isolating impaired loan portfolios so that they can be dealt with effectively and separately from the bank's core business.
While a sustainable NPL resolution is a complex and time consuming task, some of the countries, such as Slovenia, are already making substantial progress towards it. Others, like Montenegro and Romania for instance, are also making efforts in dealing with the problem and are steadily achieving progress. There has been quite an effort to push this forward but more needs to be done.
What could be done in terms of regulatory oversight and government policy to tackle the NPLs issue?
Non-bank sources of finance - such as asset based lending, leasing, factoring, etc - remain limited and need to be developed.
This differs from country to country. Some need to strengthen their laws on insolvency in order to ensure efficient court and out-of-court procedures. A lot is down to the banks which have to clean up their balance sheets, although some countries may consider the so-called ‘bad bank' model, i.e. centralized bank asset management funds. Every solution costs time and money. There are different ways to tackle NPLs: write-offs, carve-outs or wind-downs - for which banks need strong capital reserves, which regulators forced them to build up in recent years. But the crucial thing is to act, because the cost of risk provisioning of existing NPLs is weighing heavily on banks' ability to lend.
Vienna 2.0 as successor to the Vienna Initiative has a working group on NPLs. They have issued a report with guidelines and are monitoring the situation. The forum is useful for bringing all parties together to exchange ideas and learn from each other.
The EBRD is also intensifying its engagement to work on NPL resolutions and offering technical assistance by its legal experts and also considering conducting market assessments in some countries.
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